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Inflow of Foreign Funds Boosts China Stocks

China stocks finished another solid week on Friday and look poised to ride increasing liquidity to more gains.

The Hang Seng Index in Hong Kong didn’t exactly end the week with a flourish, edging up 0.2% to 21,552 in moderate turnover. But for the week the index rose 2.0% and has advanced 3.2% since re-opening October 3 after a holiday. H-shares, measured by the index of Chinese companies, are doing even better, surging 8.7% since October 3 to 10,684. On Friday they climbed 0.4% to cap a 3.3% rise for the week.

China stocks have gained momentum this month on the prospect of an economic turnaround and the expectation new Chinese leaders scheduled to step up at the Party Congress on November 8 will introduce measures to stimulate and reform the economy.

Encouraging statistics released Thursday further strengthened the outlook for a turnaround in the slumping Chinese economy in the fourth quarter.

“GDP should bottom out this quarter (at 7.4%) and rise to 7.8% in the fourth quarter,” said Peter So, managing director and co-head of research at CCB International. “We should see stock prices rise, especially because liquidity is increasing in China.”

Appreciation of the RMB and the Hong Kong dollar indicate funds are flowing into China and Hong Kong, So told Equities. A rise in China’s money supply in September adds to expanding liquidity he said.

Although gains have been strong this month, So said, there hasn’t been one sector that stands out. Funds flowing into the market are chasing laggards, rotating from properties to retail, shipping and commodities.

“After the market is re-rated, then investors will look for quality and earnings,” he said. “I strongly advise investors to buy properties, banks and infrastructure stocks. There are likely to be policies supporting these areas after the Congress in November.”

Two of the stocks So likes are Poly Property (0119, HK) and China Land (CRBJY). End

Chinese Stocks in the U.S.: +1.9, 389.6, 10-18-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong traded in a narrow range after opening slightly higher due to gains in European markets. Cement producers rose: BBMG (BBMPY) +4.2%. KGI Research

Quotable: "We believe the economy has bottomed and GDP growth should recover to ~8% in 4Q, for the following reasons: 1) Demand is improving. Increasing infrastructure spending by the government and the recovery of real estate investment will spur FAI growth, while the ongoing US recovery will also help stabilize export demand; 2) "Destocking” is over, to be followed by'restocking.'" BOCOM International. 10-19-12

Chinese Company to Watch: "Despite high financial leverage, Poly Property (0119, HK) has advantages in strategic layout and sales execution, so it is a good investment choice among medium-sized real estate shares." Phillip Securities. 10-19-12

Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN

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